Tariffs: Theory and Practice

Economic theory suggests that free trade is beneficial to the trading countries, and that tariffs, which are taxes on imported products, reduce economic welfare. Nevertheless, the arguments for and against tariffs are contested, and there is evidence that one of the most common, that of enabling new industries to grow, is supported by some historical episodes.

Tariffs have been employed since 300BCE, and at times have played a key role in countries’ economic policies. Today, however, non-tariff barriers to trade are considered to be more significant. These include, for example, safety standards, sanitary checks on food and how products are advertised. Non-tariff barriers are particularly significant for trade in services.

International efforts to regulate trade and reduce tariffs began after World War II, leading to the establishment of the World Trade Organization (WTO) in 1995. WTO members account for 98% of world trade. Trading on ‘WTO terms’ requires each member to apply equal tariffs to all other members. However, this does not apply if members form a formal trading area, such as the EU, have a bilateral trade agreement, or in certain other circumstances.

As a member of the EU, the UK trades with other members free of tariffs and with efforts to minimise non-tariff barriers, while each member of the EU applies a common tariff to non-members. This will change when the UK leaves, but the UK’s position after Brexit will depend on the form of its departure. With a deal, little would change in practice until the end of the implementation period, and somewhat similar arrangements could continue to apply (although for goods only) for longer if the ‘backstop’ comes into force. In the event of no deal, the UK would move to trading on WTO terms immediately. The Government is attempting to replicate the EU’s trade agreements with other countries, which could then be put in place bilaterally to ensure continuity of trade arrangements either after the implementation period or in the event of no deal. Some have been agreed and others are still under negotiation. However, they cover a small percentage of UK trade, and would not include EU countries, which themselves are the partners in around half of UK trade.

The UK has also published its proposed schedule of tariffs to apply to countries where there is no trade agreement in the case of no deal. Overall, these tariffs are slightly lower than apply at present as a member of the EU. However, there would be large changes for some specific goods. The Government has stated that they are intended to balance the interests of consumers and industries.